Activist and fundraiser Dan Pallotta calls out the double standard that drives our broken relationship to charities. Too many nonprofits, he says, are rewarded for how little they spend — not for what they get done. Instead of equating frugality with morality, he asks us to start rewarding charities for their big goals and big accomplishments, even if that comes with big expenses. In this talk, he says: Let's change the way we think about changing the world.

About Dan Pallotta

Everything the donating public has been taught about giving is dysfunctional, says AIDS Ride founder Dan Pallotta. He aims to transform the way society thinks about charity and giving and change. Pallotta says there's a double standard between the for-profit and nonprofit sectors. Businesses are celebrated for risk-taking and focusing on financial incentive, while non-profits are sentenced to begging.

Pallotta believes the economic starvation of our nonprofits is why are not moving the needle on great social problems. Pallotta is best known for creating the multi-day charitable event industry, and a new generation of citizen philanthropists with the AIDS Rides and Breast Cancer 3-Day events, which raised $582 million in nine years. He is president of Advertising for Humanity, which helps foundations and philanthropists transform the growth potential of their favorite grantees.

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Transcript

GUY RAZ, HOST:

It's the TED Radio Hour from NPR. I'm Guy Raz. And on the show today, giving it away, which isn't how Dan Pallotta started out because when he was a kid in Malden, Massachusetts, Dan Pallotta's focus was on making, as in making money.

DAN PALLOTTA: It was me and Patrick Bruno. We had - you know, we were the two big competitors in the neighborhood, and he had the Leones'(ph) lawn, which was the prized lawn. You wanted to get the Leones' lawn 'cause they paid like $6. And I had the Lukes, and they paid five. And the Worcesters(ph), they paid four. But then, that winter I bought a snow blower from my neighbor for 60 bucks. I bought a Toro snow blower, eight horsepower snow blower, and that was the winter we had the blizzard of '78. I made the 60 bucks back in the first 6 inches. I remember Mr. Lock(ph) telling my mother, that kid's going to go places.

RAZ: And he did. College at Harvard, elected to the school board at 19, a budding entrepreneur. But something happened on the way to Wall Street. Dan Pallotta decided he could make and give, an idea that eventually upended his life. He told the story on the TED stage.

(SOUNDBITE OF TED TALK)

PALLOTTA: I want to talk about social innovation and social entrepreneurship. I want to talk about how the things we've been taught to think about giving and about charity and about the nonprofit sector are actually undermining the causes we love and our profound yearning to change the world. Charitable giving has remained stuck in the U.S. at 2 percent of GDP ever since we started measuring it in the 1970s. Why has poverty remained stuck at 12 percent of the U.S. population for 40 years? Why have our breast cancer charities not come close to finding a cure for breast cancer, or our homeless charities not come close to ending homelessness in any major city? And the answer is these social problems are massive in scale, our organizations are tiny up against them, and we have a belief system that keeps them tiny. We have two rulebooks, one for the nonprofit sector and one for the rest of the economic world. So Amazon went for six years without returning any profit to investors and people had patience. But if a nonprofit organization ever had a dream of building magnificent scale that required that for six years, no money was going to go to the needy, it was all going be invested in building this scale, we would expect a crucifixion.

We tell the for-profit sector spend, spend, spend on advertising until the last dollar no longer produces a penny of value. But we don't like to see our donations spent on advertising in charity, as if the money invested in advertising could not bring in dramatically greater sums of money to serve the needy. And if we tell the consumer brands, you may advertise all the benefits of your product, but we tell charities, you cannot advertise all the good that you do, where do we think the consumer dollars are going to flow? So in the for-profit sector, the more value you produce, the more money you can make. But we have a visceral reaction to the idea that anyone would make very much money helping other people. Interesting that we don't have a visceral reaction to the notion that people would make a lot of money not helping other people. You know, you want to make $50 million selling violent video games to kids, go for it, we'll put you on the cover of Wired magazine. But you want to make half a million dollars trying to cure kids of malaria, and you're considered a parasite yourself.

(APPLAUSE)

RAZ: And this idea, well it's personal for Dan, because back in the mid-1990s he formed a for-profit company. It was called Pallotta Team Works and it was designed to help charities and nonprofits raise money and grow, grow a lot.

PALLOTTA: We didn't charge a percentage like some firms do. We just charged a fixed fee for each event. You know, okay, we'll produce this event in Boston for, whatever, $250,000 no matter how much it raises and 100 percent of the money went to the charities.

RAZ: So Dan's first event was a charity bike ride for AIDS research, and he launched it with $50,000 in seed money he got from a gay rights group in LA.

PALLOTTA: We netted a million thirteen thousand dollars on that first event, and we had predicted that we'd net $600,000, so that was a huge success and...

RAZ: Wow, you turned $50,000 into more than a million.

PALLOTTA: Net. Yeah. We didn't just turn it into a million, because that proved the concept, right? So on that basis, other people wanted to do the AIDS rides and other people started putting up capital. And at the end of nine years, that little idea was $108 million net.

RAZ: The years between 1994 and 2002 were a period of incredible growth for Dan's company. For eight solid years, he ran the organization unlike any charity or nonprofit. Instead, it operated just like a for-profit company, because it was.

PALLOTTA: Like in those days, everything was in black and white. Printing in color was a big deal for a charity and you rarely saw it. So one of the things was, I want color brochures. I want color ads.

RAZ: So the second year he helped to mount that AIDS charity ride, the organizers wanted to expand to New York.

PALLOTTA: And I thought, we need a full-page ad in the Arts and Leisure section, on a Sunday, in the New York Times.

RAZ: $40,000 to run that ad in the New York area.

PALLOTTA: That $40,000 ad brought in two and a half million dollars in revenue, and so of course you start buying more ads when you see that.

RAZ: And with more money, Dan hired more people, but not from the nonprofit world.

PALLOTTA: You know 12, I think, vice presidents and they were all top-notch. They'd come from law firms and for-profit businesses.

RAZ: And some of them made six figures. Dan also hired professionals to produce his events to mount these giant theatrical experiences.

PALLOTTA: We had this incredible professional touring team for the logistics. Top-notch carpenters and riggers and electricians and plumbers.

RAZ: All the while, Pallotta Team Works grew into a national force, 350 people in 16 offices.

PALLOTTA: Boston, New York, Chicago, San Francisco, LA, Washington D.C., San Diego, Miami, Dallas, Denver, Seattle. You know, you're firing on all cylinders and everyone's working really hard. To be around that kind of success, especially when it's in the name of these important causes, you know, there's nothing like it, and millions of dollars got raised at the same time.

RAZ: And the company was nimble. It could turn on a dime. It didn't have to run every decision by a board the way lots of other nonprofits do, and Dan owned it. He had a personal stake in its success.

PALLOTTA: You know, I just didn't want to build something, and put my heart and soul into something, and maybe my money - and eventually, you know, I put up everything I was worth to borrow money to launch the AIDS vaccine rides. I signed personal guarantees. I didn't want to do that without being able to own it, without being able to have equity in it.

(SOUNDBITE OF TED TALK)

PALLOTTA: 2002 was our most successful year ever. We netted, for breast cancer alone, that year alone, $71 million after all expenses. And then we went out of business, suddenly and traumatically. Why? Well, the short story is our sponsors split on us. They wanted to distance themselves from us because we were being crucified in the media for investing 40 percent of the gross in recruitment and customer service and the magic of the experience. And there is no accounting terminology to describe that kind of investment in growth and in the future other than this demonic label of overhead. So on one day, all 350 of our great employees lost their jobs because they were labeled overhead. Our sponsor went and tried the events on their own. The overhead went up, net income for breast cancer research went down by 84 percent or $60 million in one year.

(SOUNDBITE OF MUSIC)

RAZ: Almost all of Dan's business came from that one sponsor, and because of the media criticism no other charities wanted to work with the group.

PALLOTTA: And, you know, we needed $12 million every year, essentially, to capitalize the events 'cause the events would cost a lot of money at first, before the donation money would start coming in. And, you know, we just couldn't find that money overnight and we had a payroll to meet. We had to shut the company down. There was no - it had become too big to do a small layoff.

RAZ: That must have been personally devastating.

PALLOTTA: Yeah. It was - yeah, it was the saddest day of my life, you know. And I've had a - I lost my partner to suicide, and you know, I've had many, many friends die, but to lose your whole professional family in one day, you know, all 350 people gone. Yeah, it was a death, but worse. Because, you know, when someone dies, people come with flowers and they surround you with support. When your company goes out of business, everybody heads for the hills. You know, it's the entrepreneur's fate, I guess, when something goes wrong. But it's about as lonely and devastating an experience as I can think of and I wouldn't wish it on my worst enemy.

(SOUNDBITE OF TED TALK)

PALLOTTA: This is what happens when we confuse morality with frugality, and we think of this as our system of ethics. But what we don't realize is that this system has a powerful side effect, which is it gives a really stark, mutually exclusive choice between doing very well for yourself and your family, or doing good for the world, to the brightest minds coming out of our best universities and sends tens of thousands of people, who could make a huge difference in the nonprofit sector, marching every year, directly into the for-profit sector because they're not willing to make that kind of lifelong economic sacrifice. Businessweek did a survey, looked at the compensation packages for MBAs ten years out of business school, and the median compensation for a Stanford MBA, with bonus, at the age of 38 was $400,000. Meanwhile, for the same year, the average salary for the CEO of a $5 million-plus medical charity in the U.S. was $232,000, and for a hunger charity $84,000. Now there's no way you're going to get a lot of people with $400,000 talent to make a $316,000 sacrifice every year to become the CEO of a hunger charity.

Some people say, well, that's just 'cause those MBA types are greedy. Not necessarily. They might be smart. It's cheaper for that person to donate $100,000 every year to the hunger charity, save $50,000 on their taxes, so still be roughly $270,000 a year ahead of the game, now be called a philanthropist because they donated $100,000 to charity, probably sit on the board of the hunger charity, indeed, probably supervise the poor SOB who decided to become the CEO of the hunger charity, and have a lifetime of this kind of power and influence and popular praise still ahead of them.

Now, this ideology gets policed by this one very dangerous question, which is what percentage of my donation goes to the cause versus overhead? There are a lot of problems with this question. I'm going to just focus on two. First, it makes us think that overhead is a negative, that it is somehow not part of the cause. But it absolutely is, especially if it's being used for growth. Now this idea that overhead is somehow an enemy of the cause creates the second, much larger problem, which is it forces organizations to go without the overhead things they really need to grow, in the interest of keeping overhead low. So we've all been taught that charities should spend as little as possible on overhead things like fundraising, under the theory that, well, the less money you spend on fundraising, the more money there is available for the cause. Well, that's true, if it's a depressing world in which this pie cannot be made any bigger.

(SOUNDBITE OF MUSIC)

PALLOTTA: We've all been taught that the bake sale with 5 percent overhead is morally superior to the professional fundraising enterprise with 40 percent overhead. But we're missing the most important piece of information, which is what is the actual size of these pies? Who cares if the bake sale only has 5 percent overhead if it's tiny? What if the bake sale only netted $71 for charity because it made no investment in its scale, and the professional fundraising enterprise netted $71 million because it did? Now, which pie would we prefer and which pie do we think people who are hungry would prefer?

Here's how all of this impacts the big picture. I said that charitable giving is 2 percent of GDP in the United States, that's about $300 billion a year. But only about 20 percent of that, or $60 billion, goes to health and human services causes. The rest goes to religion and higher education and hospitals, and that $60 billion is not nearly enough to tackle these problems. But if we could move charitable giving from 2 percent of GDP, up just one step, just one step to 3 percent of GDP by investing in that growth, that would be an extra $150 billion a year in contributions. And if that money could go disproportionately to health and human services charities, because those were the ones we encourage to invest in their growth, that would represent a tripling of contributions to that sector. Now we're talking scale. Now we're talking the potential for real change. But it's never going to happen by forcing these organizations to lower their horizons to the demoralizing objective of keeping their overhead low. People are yearning to measure the full distance of their potential on behalf of the causes that they care about deeply, but they have to be asked. Our generation does not want its epitaph to read, we kept charity overhead low.

(APPLAUSE)

PALLOTTA: We want it to read that we changed the world and that part of the way we did that was by changing the way we think about these things. So the next time you're looking at a charity, don't ask about the rate of their overhead, ask about the scale of their dreams, their Apple, Google, Amazon-scale dreams, how they measure their progress toward those dreams and what resources they need to make them come true, regardless of what the overhead is. Who cares what the overhead is if these problems are actually getting solved? If we can have that kind of generosity, a generosity of thought, then the nonprofit sector can play a massive role in changing the world for all those citizens most desperately in need of it to change. Thank you.

(APPLAUSE)

RAZ: Wow. But I mean, is it ever going to change, you know, the way we think about how charities should operate?

PALLOTTA: Absolutely, it's going to change. We're going to make it change. We just need to get methodical about it, and the nonprofit sector has not been methodical about it. We don't have an Anti-Defamation League, despite the fact that we get defamed in the media all the time. The nonprofit sector has not taken responsibility for its full self-expression, in part because it thinks that it's wrong to be self-interested. Well, imagine if the gay community thought self-interest was a bad thing. If we cannot liberate ourselves from these restraints, we cannot possibly liberate people from poverty and disease and the other things.

RAZ: So where do you start? How do you make it happen?

PALLOTTA: You know, the famous, iconic John Kennedy quote, "ask not what your country can do for you, ask what you can do for your country." Well, I think people have been asking and nobody's been giving them anything big to do. You know, we just underestimate people all the time. People want to make a difference and they want to make a big difference and they want to do something epic and heroic in this lifetime. Sometimes, they don't even know it 'til you show it to them.

RAZ: Dan Pallotta. He wrote a book about all of this. It's called "Charity Case." You can see all of Dan's talk at TED.com.

(SOUNDBITE OF SONG "GIVE IT AWAY")

RED HOT CHILI PEPPERS: (Singing) There's a river born to be a giver.

RAZ: Coming up, a friend he made on his way to give that talk.

PALLOTTA: So I get on the plane, and there's this woman sitting next to me and she's making all of these weird hand movements.

RAZ: And she's wearing this like, weird makeup.

PALLOTTA: Weird makeup, and then she pulls out a TED catalog. And I said, are you going to TED? And she goes, yeah, I'm speaking. And I said, oh, I am, too. And she said, what's your name? And she starts flipping through the catalog.

RAZ: Musician Amanda Palmer.

AMANDA PALMER: Dan and I are making plans to have him bring his kids over to my house for dinner.

RAZ: That's great.

PALMER: We've made best friends and we loved each other's talks.

(SOUNDBITE OF SONG "GIVE IT AWAY")

RED HOT CHILI PEPPERS: (Singing) What I've got, you've got to give it to your mamma. What I've got, you've got to give it to your pappa. What I've got, you've got to give it to your daughter. You do a little dance and then you drink a little water. What I've got, you've got to get it, put it in you. What I've got, you've got to get it, put it in you. Give it away, give it away, give it away now. Give it away, give it away, give it away now. Give it away, give it away, give it away now. Give it away now. Give it away now.

RAZ: Stay with us. I'm Guy Raz. On the show today, giving it away. It's the TED Radio Hour from NPR. Transcript provided by NPR, Copyright NPR.